Netflix (NFLX) stock is down 25% since its second-quarter report back in July and trading roughly 50% below its all-time highs heading into its Q3 earnings release after the closing bell on Wednesday, October 18.
The question right now is should investors consider buying the beaten-down streaming powerhouse for long-term upside at its current levels?
The Basics
Netflix was the streaming TV pioneer that revolutionized the way people watch movies and TV shows. Streaming TV remains a growth segment and it is the future of entertainment. Yet, Wall Street has sold Netflix stock based on wider concerns about growing competition, slowing expansion, and more recently the Hollywood strikes.
Nearly every company in the streaming TV economy is raising prices, and some worry it might lead to consolidation that ends up looking something like linear TV packages.
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Nonetheless, NFLX’s head start and growing content library have helped it maintain an edge over Disney (DIS), Apple, Amazon, and countless other streamers. NFLX beat our Q2 earnings and sales estimate in July after it grew its global paid memberships by 8% YoY to reach over 238 million—Disney+ closed last quarter with roughly 146 million subscribers.
Netflix’s lower-cost ad-based tier is gaining steam, and it is actively expanding its video game segment, which could prove lucrative in the long run.
Other Fundamentals
Netflix is projected to grow its adjusted earnings by 20% in FY23 and another 28% in 2024, on 6.5% and 13%, respective revenue expansion. Yet, NFLX’s EPS estimates have trended in the wrong direction recently to help it land a Zacks Rank #3 (Hold).
The top-line growth projections also mark a dramatic slowdown from the 28% average sales expansion Netflix posted between FY17 and FY21.
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But Wall Street already punished Netflix for its fading revenue growth as the streaming market becomes more saturated. Plus, the company posted 7% sales expansion in 2022.
On the valuation front, Netflix is trading at a 70% discount to its 10-year median at 24.6X forward 12-month earnings and nearly 95% below its peaks. Netflix is now trading roughly in line with the broader Zacks Tech sector’s 23.4X and below other big tech names.
Netflix stock has soared 650% in the last decade to more than double the Zacks Tech sector. Yet NFLX has moved roughly sideways over the last five years, with it down 50% from its peaks.
Bottom Line
Netflix’s average Zacks price target offers 24% upside to its current levels and it has already made a large comeback from its lows. But NFLX is trading below both its 50-day and 200-day moving averages right now.
NFLX is also back beneath its much longer-term 200-week and 50-week moving averages. All in, investors might want to see how Wall Street reacts to Netflix’s upcoming report before possibly buying the stock on the dip.
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